I've been browsing thehousingbubbleblog.com for about 9 months now -- perhaps the focus is too much on bad news but everything there backs up the above letter to the T. Every day, you read multiple quotes from sellers, borrowers, real estate agents, mortgage brokers that leave you speechless. Like this one which I actually read in my local paper first:
‘He was declined because they wouldn’t do stated-income loans above 90 percent anymore,’ Williams says. ‘If he provided full documentation for his income, he wouldn’t qualify for the loan because he doesn’t make enough money’
Uhh ... did this agent/broker just tell the newspaper he's helping a borrower lie about his income on mortgage documents? And the mortgage market freeze-up is the only reason why this fraudulent loan was declined?
1. yes he did lie and he just told the newspaper that
2. no it's not the only reason, but it is the main reason. 2 years ago, with constantly rising housing prices, lenders didn't care, they just made the loans. So yes, the freeze-up is why this is not happening now.
it was a classic 'pass the parcel' game, with everyone taking their commission and passing on the risk. Lenders didn't care because they were only brokers/ originators. They securitised the mortgages by passing them on to investment banks rather than holding them on balance sheet as in the bad old days of banking. Investment banks repackaged the mortgages and passed them on to hedge funds, who levered their positions to buy them. Pension funds invested in the hedge funds (as well as taking the CDOs on themselves).
This is how European financial institutions are going bust on US financial malfeasance. If you are playing poker, and you cannot figure out who is the mug, you are the mug.
Investment banks had the right to 'put' bad mortgages back on the originators. But if the originators go broke, that's a useless guarantee. So investment banks were buying up originators.
Now the investors are suing the investment banks who are in turn suing the originators.
The worst part is the honest people caught in the middle of this. They'll be trying to pay their mortgages, or trying to reschedule, but they have no direct contact with the owner of their mortgage. The servicer, if it is still in business even, is just a call centre somewhere, and has no authority to take decisions. *this* will make the problem worse than previous downturns (as will the new personal bankruptcy laws, which will prevent/ delay the market from sorting this out).